Transient fads and the crash of '87

Chang Jin Kim, Myung Jig Kim

Research output: Contribution to journalArticlepeer-review

21 Citations (Scopus)

Abstract

Using a fad model with Markov-switching heteroscedasticity in both the fundamental and fad components (UC-MS model), this paper examines the possibility that the 1987 stock market crash was an example of a short-lived fad. While we usually think of fads as speculative bubbles, what the UC-MS model seems to be picking up is unwarranted pessimism which the market exhibited with the OPEC oil shock and the '87 crash. Furthermore, the conditional variance implied by the UC-MS model captures most of the dynamics in the GARCH specification of stock return volatility. Yet unlike the GARCH measure of volatility, the UC-MS measure of volatility is consistent with volatility reverting to its normal level very quickly after the crash.

Original languageEnglish
Pages (from-to)41-58
Number of pages18
JournalJournal of Applied Econometrics
Volume11
Issue number1
DOIs
Publication statusPublished - 1996

ASJC Scopus subject areas

  • Social Sciences (miscellaneous)
  • Economics and Econometrics

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